Adib plans hybrid sukuk

Perpetual bond would not have maturity date, could appeal mostly to international investors

By

Reuters

PublishedTuesday, November 06, 2012

Abu Dhabi Islamic Bank (Adib) is set to become the first Gulf Arab company to issue a hybrid Islamic bond this week, but investors are likely to demand a big premium for the rare structure.

The bank is expected to raise at least $500 million to shore up its core capital, to comply with tighter Basel III global standards for Tier 1 capital which will be introduced in the UAE in coming years.

In recent years, Gulf lenders including Commercial Bank of Qatar, Burgan Bank and Saudi Hollandi Bank have sold instruments to raise Tier 2 capital.

But Adib’s Tier 1 sukuk structure is a different animal: It does not have a maturity date - hence it is "perpetual" - and the principal is repaid at the discretion of the issuer.

If Adib’ss issue is successful, it could pave the way for other banks in the region to follow suit, although the jurisdiction in which the bank is located will be important.

One banker said he believed that within the Gulf, only banks from Abu Dhabi or Qatar could feasibly get such a deal done, because governments there have directly supported local banks by injecting capital through various means. This history of support would make investors more comfortable.

The Adib sukuk is callable at year six, according to an investor presentation seen by Reuters, and on every periodic distribution date after that. It will carry a fixed profit rate of six-year midswaps over the initial margin.

Investors agree that Adib, rated A+, will have to pay much higher yields than it would for a fixed-term, plain vanilla sukuk. The instrument is expected to appeal mainly to international investors familiar with the structure, rather than investors within the Gulf.

"Much will depend on how is it perceived in terms of the structure. This is certainly nothing to do with prevailing benchmark tenors and corresponding rates," said a regional investor, requesting anonymity.

"For a perpetuity, my bosses will not allow me to splurge the bank's money at 2 or 3 per cent."

The investor added that pricing in a range of 6.5 per cent to 7 per cent, however, would draw interest among potential Gulf buyers.

"The timing isn't great as most banks would be almost full on annual budgets," he said, referring to the fact that banks will soon close books at the end of the year. "Anything below 6 per cent, I'm off it."

ASIAN PRIVATE BANKS

As with other recent bank capital offerings from emerging markets lenders, especially perpetuals from Banco do Brasil , VTB and Gazprombank, the Asian private bank bid is expected to be key in determining Adib's success.

Private banks in Malaysia, which are familiar with sukuk, are expected to play a big part.

"Being the first of its kind from the Middle East, there are no benchmarks for where a deal like this prices. If it offers at least 6 per cent, it should fly out of the door," the banker said.

"What else can you buy in the region at that level? The challenge is that the deal is unrated, which will probably put off some accounts, but I think it will get good sponsorship from private banks as the yield will be very attractive."

Adib last tapped debt markets for a $500 million, five-year sukuk in November last year; it carried a profit rate of 3.78 per cent. The sukuk was bid at 105.2 cents on the dollar on Tuesday, yielding 2.4 per cent.

Yields will have to reflect the dividends which shareholders can typically expect. Adib shares ended flat on Tuesday, but have gained 4.8 per cent year-to-date.

"The dividend yield on Adib equity is 7.4 per cent. So this sukuk should ideally be priced slightly below this level," said a regional treasury source.

DEBT VS EQUITY

Several features of the Adib sukuk qualify it more as an equity instrument than a plain vanilla sukuk, which is usually classified as senior debt.

The upcoming perpetual sukuk will be classed as deeply subordinated, with proceeds used to strengthen Adib’s core capital rather than booked as a liability on its balance sheet.

"Common equity is generally perpetual, unlike bonds and sukuk, which typically have a defined maturity. Adib’s Tier 1 also features a discretionary profit payment, which more closely resembles an equity dividend than a bond's coupon payment," said Nick Stadtmiller, head of fixed income research at Emirates NBD.

"The economics of Adib's Tier 1 notes have more equity-like features to allow them to book the notes as capital on their balance sheet, rather than as a liability."

Adib shareholders approved the capital-boosting measures at a meeting last month. The bank had a Tier 1 capital ratio of 13.45 per cent at the end of June 2012, and said in its second-quarter results that it aimed to raise this to above 15 per cent in the near term.

Adib, the largest shariah-compliant bank by market value in Abu Dhabi, is to conclude investor meetings on Wednesday in Zurich, after kicking off meetings last week in the Middle East and Asia.

The bank has mandated itself, HSBC Holdings, Morgan Stanley, National Bank of Abu Dhabi and Standard Chartered to arrange the deal.